Answer by E. Thompson:
There is a symbiotic relationship between teacher and student in some martial arts schools. Out of respect for the teacher, as well as wanting to be part of the group, sometimes students will start to overreact as an uke (training partner). This contributes to the teacher's thinking that he has magical powers which leads into the students becoming more enthralled with his magical powers and overreacting more in cycle of mutual belief.
What we saw here was this cycle hitting critical mass. The teacher being fed by the students, being fed by the teacher ultimately believes he has become a wizard. Then he probably fell into the trap of one of his students saying,"Sensei, you could easily defeat a MMA fighter, right?" He had to go all in at that point.
Or he's just a horrible person selling snake oil and is fully aware of it.